Money Matters

Money Matters: Look beyond the steak dinner when evaluating retirement strategies

CorrespondentNovember 9, 2013 

Q. We know how you feel about the “free” dinner seminars, but we couldn’t help ourselves. The invitation was to a very expensive chain steakhouse, so we went for the meal.

It turns out the ideas presented at the dinner were of great interest to us. The focus was on converting your “tax hostile” IRA to a “tax free” investment vehicle. They also mentioned that the government may decide to seize assets within retirement plans and it is best to plan ahead and remove as many assets as possible sooner rather than later.

The idea is to take money from your IRA and buy a type of life insurance called equity indexed universal life insurance. Take a large sum out one year to pay the premium and then the next year we’d borrow from the policy to pay any taxes owed.

The money grows tax-deferred in the insurance policy until we retire and then the money can come out tax free each year to help meet our expenses in retirement. Since this is not an IRA, the money would be protected from any possible future seizing of retirement funds. My wife and I are in our mid-50s, and we both have fairly large IRA roll-overs from previous jobs. We plan to keep working for at least 10 years so the money in the policy would have time to grow. Is this a strategy we should consider?

A. Glad you had a nice steak dinner.

Think about this; doesn’t it make sense that the more expensive the “free” dinner, the more the presenter is anticipating to make from sales to attendees that follow their advice? If they have such great financial ideas why do they have to buy you a steak?

The rumors that the U.S. government will be able to seize retirement funds have been around for a long time. It does seem like higher taxes and penalties may be in our future, but I don’t think Congress, the president and the Supreme Court are going to allow a seizure of funds to happen.

I can’t promise that it won’t, but I don’t think it is likely. Current proposals of not allowing any tax deduction for contributions once a person’s retirement account balance reaches $3.5 million and disallowing a stretch IRA for non-spouse beneficiaries is a heads up on what the future may hold for savers and their children.

Don’t let fear and unsubstantiated rumors determine your investment and retirement planning strategies. Pay attention to new laws being proposed and passed. Maintaining a diversified portfolio not only in asset classes but also in types of accounts, taxable, tax neutral (partially taxed such as an after tax investment account) and tax free (such as Roth IRAs and Municipal bonds) can offer more flexibility as laws change.

Depending on the amount of money you will be taking out to pay the premiums, the amount you’d need to borrow to pay the taxes and changes to the Equity Indexed Universal Life policy, the proposed strategy could have a very negative impact on your plans for retirement. If your current earnings from employment are decent and you take large distributions from an IRA to fund an EIUL policy you could easily put yourself in the 39.6 percent federal tax bracket. When you add a state tax of 8 percent, a 10 percent penalty since you are under age 591/2, the new 3.8 percent unearned income Medicare tax, your tax bite on the withdrawal might be as high as 61.4 percent.

The assumptions used in the illustration may show that this strategy works, but any future changes in the underlying assumptions could spell disaster.

You need to know what rate is used for the lending rate and whether it is fixed or variable. If it’s fixed, that is good. If the rate used in the illustration is variable, it is probably going to increase over the life of the policy.

Most current lending rates I’ve seen are much lower than the 50-year historical average lending rate of 7 percent on life policies. When you begin borrowing from your policy in retirement, if the policy lending rate is higher than the rate used in the illustration, the amount you can borrow from the policy will be much less than what is shown in the illustration. When the interest on policy loans is charged is also relevant. Do they charge at the beginning or the end of the year. Since you are purchasing the life insurance policy to build cash value, you will also want to know whether the policy fees are structured to minimize the life insurance and maximize the cash value.

You also need to understand the impact cap and participation rates will have on your future income stream. If this has been helpful, you can send me a gift certificate to your favorite steak place.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at or P.O. Box 97128, Raleigh, NC 27624

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